Interview: HP CEO Meg Whitman on Keeping the PC Business

I just got off the phone with Hewlett-Packard CEO Meg Whitman and HP’s executive vice president Todd Bradley: We talked about HP’s decision to keep its PC-making Personal Systems Group, which Bradley runs, inside HP, rather than spin it off into a separate company.

The decision amounts to the first — and it may turn out to be the only — repudiation so far of the strategic steps taken by HP’s prior CEO, Léo Apotheker. HP rolled out the decision to “study strategic alternatives” for the PC unit in a messy, multipronged announcement on Aug. 18.

The spinoff scenario made little sense in light of two key factors: HP is the biggest PC maker in the world, and while its profit margins are slim, its market lead over rivals Dell and Acer continues to widen. Second, by staying in the PC business, HP continues as the world’s largest consumer of chips and hard drives and other key components that are used across its other lines of products, like enterprise servers and even printers. Cutting off its PC business would have weakened HP from a negotiating standpoint with suppliers like Intel, Seagate and others, and would thus cut into HP’s more profitable lines of business. So when Whitman says of the PC business that “together we are stronger,” she’s not kidding. It’s a fundamental truth of HP’s business.

That Aug. 18 announcement also included the end of HP’s webOS hardware business; the $11.7 billion acquisition of the British software firm Autonomy; and, last but not least, a reduction in its revenue outlook for the fiscal year. Apotheker lost his job 35 days later.

Also during today’s call, Whitman said that she wants to make sure that HP isn’t spreading itself too thin. “I’m a big believer in doing a small set of things really, really well,” she said.

Still outstanding, and apparently undecided, is the fate of the webOS business. HP killed the hardware aspect of that business following ridiculously poor sales of its TouchPad tablet. Since then, the message has been on again, off again as HP has variously cut the prices on its existing inventory of TouchPads, then committed to making a few more, as consumers swooped in to buy them at a discount. There were no decisions about that today.

But given that Whitman, as an HP director, first signed off on the plan to explore the spinoff of the PC business, and has now decided against it as HP’s CEO, my first question for her was essentially this: What changed?

AllThingsD: So, Meg and Todd, let’s start at the top. Meg, in August, when you were a member of HP’s board of directors, you signed off on the decision to explore a spinoff, and now you’re going in the other direction. What changed your mind?

Whitman: As a board member, I supported the idea of exploring strategic options. This was an idea that had been floated for quite some time. We didn’t wake up this summer and decide to do it, so it wasn’t a new idea. We were looking at this from a real position of strength. This is a fabulous business. It’s No. 1 in its business, and profitable, which is quite different from the IBM-Lenovo decision a few years ago. So I was supportive. As a board member, I thought that if it’s better for customers and better for shareholders, we should look at it. I mean, that’s your fiduciary obligation as a board member. And then when I came on as CEO, I asked for a really data-driven analysis, line by line, cost center by cost center, of what the real cost synergies would be, or what the increased costs would be, and what the revenue losses or synergies might be. We had 18 different work streams with more than 100 people involved in this, and it was a real tour de force, because it’s something that HP does really well. And the math was very compelling on this. The costs to separate were far greater than the costs to remain together. That was the first thing we did. The second thing was that we talked to customers and channel partners, and the feedback was, by and large, that “you are stronger together.” They appreciate the full line of products. They appreciate the supply-chain synergies and cost reductions you get by being one company. So after we went through the analysis, it was compelling.

I keep coming back to the idea that you buy more parts than anyone else, and so being the biggest PC maker would necessarily weaken your ability to negotiate with suppliers like, say, Intel. You get a better price on chips for servers by also being the biggest maker of PCs, for which Intel also supplies a lot of chips. Is it really that simple, or is it more complicated?

Whitman: That’s one element of it. We are the largest buyer of components, we have the best supply chain. And we’re stronger and bigger in server storage and networking because we have PCs.

Bradley: Over the past six years, myself, VJ Joshi [HP's head of printing and imaging] and Dave Donatelli worked very closely to see where we can consolidate and coordinate our supply-chain efforts, whether that’s buying things from Intel or logistics providers or manufacturing facilities. So there’s a breadth of integration that takes place. We all want to get what leverage we can out of commonality, without destroying the ability to innovate within each one of our very different businesses. To give credit where it’s due, a lot of Mark Hurd’s leadership was around getting a lot of efficiency out of our supply chain …

Whitman: Absolutely.

Bradley: … and it clearly has been a big driver to the profitability in PSG.

Whitman: The other thing that Mark did was, he centralized IT and human resources and real estate and finance, and he saved a lot of money. And he leveraged that infrastructure for the benefit of all these operating divisions. And when you think about spinning off a division after the successful integration of all these costs, its really hard, because you have to create a whole new subset of IT, or a whole new finance system, and that’s not inexpensive.

The fact then remains that PCs are a difficult business. The profit margins are thin, the competitive environment is tough — though you’re certainly on top of it now. There are challenges and difficulties — and Meg, you even conceded on the conference call that keeping PCs will weigh a bit on the overall profit margin. But I guess what I’m asking is: What’s going right about PCs, and what’s going wrong about it that you intend to fix?

Bradley: First off, I think we all at HP — not just in the PC — we focus on continual improvement. Our service to customers will never be good enough, the quality of our products will never be superior enough. It’s a quest for us, every day, to continually improve. From a margin perspective, we make a host of products, from calculators to Superdome computers. And the blending of those margins is something that Meg and Cathie [CFO Cathie Lesjak] take into account as they provide guidance both externally and internally. Our role in our big businesses is to optimize performance from a growth and profit perspective, and I think we do that pretty well. Everyone always says the PC business is really hard. I’m anxious to find a business that’s easy, because I’m ready to sign up. (Laughs.)

Well, since you bring it up, there’s been an awful lot of speculation as to your career plans, Todd. Can you say what they are now?

Bradley: I’m still planning to continue to drive PSG the way we have. We have a great team of people, and I think Meg — and I’ll say this as politely as I can — Meg has filled the leadership void that I think the company needed pretty broadly.

So we’re done speculating what your next step may be?

Whitman: We are.

Bradley: I am. I have no plans, other than to focus on how we drive PSG and HP. There are great people here to work with. It’s fair to say we learned things. This process has shown us some areas that we’re going to improve on pretty quickly. Clearly, we have some challenges, but I think I’m working with the best team of executives in the industry.

Whitman: I’d add one thing — that while the operating margin of this business is not as high as some of the other businesses at HP, the return on investment capital is really terrific. And that’s because of the business model that Todd has set up. And when you run a big company like HP, you have to look at the return on invested capital almost as much as you do your operating margin. So that is another thing to consider. We’re going to continue to be the best at managing our supply chain and manufacturing excellence. We’re going to play to win in China and Brazil and other top emerging markets. We’re going to refine the product strategy and continue to make great, trendsetting products. I’m excited about this business. I actually really like it.

Meg, we’re talking two days after Virginia Rometty was named CEO of IBM. And obviously there’s some significance that the two biggest technology companies are now run by women. Any thoughts on that? Do you know her?

Whitman: How great is that? It’s fabulous. It may be a milestone, and I’m proud to be part of it, and I’m sure Ginni is, too. I’ve only met her once.

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